When the dust settles

By Kathryn Gaw

25 Jul 2011

Investors could be forgiven for overlooking the Maghreb region’s fund industry. Since the beginning of the year, a series of popular revolutions, civil wars and suspended bourse activity have left North Africa’s economies in tatters, and its fund industry adrift.

However, four months after the ‘Jasmine Revolution’ that became the ‘Arab Spring’, new fund launches are being announced in Tunisia, and Morocco is being considered for membership of the GCC. Maghreb’s other markets, Libya, Algeria and Mauritania, represent a small fraction of Mena investment and are likely to see development struggle to take off in the wake of the crises.

But deeper problems remain. It would be easy to write off the region’s nascent fund industry as a victim of political unrest, but the truth is that transparency and liquidity issues have plagued these markets for years, and some investors are hoping that the current turmoil may lead to a more organised and open market.

“The Moroccan market is quite developed and stable,” says Rami Sidani, head of Middle East investments at Schroders. “It enjoys a good degree of transparency, communication with investors and corporate governance. But the market is not very liquid and it is continuously expensive, so it is not a market where foreign investors are very active.”


For many investors, this market begins and ends with Morocco and Tunisia. Morocco in particular benefits from ‘emerging market ‘classification on the MSCI Barra and S&Pindices. “Morocco is the biggest market in the Maghreb,” says Charbel Azzi, head of client coverage Middle East & Africa, S&PIndices. “On the fund side, there are some substantial companies there, with big asset management divisions and big AUMs, but the main focus is on the local market.”

The majority of Morocco’s funds are invested into fixed income and money markets, with about 10-15% invested into equities. Approximately 35% of the country’s funds, including leading player CDG, are state-owned, while the rest, including Wafa Gestion and BMC, are privately funded. CDG alone takes a market share of about30%. Run by the country’s $28bn SWF, the asset manager is worth about $5.7bn; a huge portion of the domestic fund industry’s estimated $40-60bn AUM.

Azzi claims that this figure has been increasing by more than 10% each year for the past three years; so why aren’t more international investors trying to break the Moroccan market?

“It is not that much of a success story,” says Azzi. “It is a success story internally. A lot of Mena investors have a mandate not to invest more than 5-10% in North Africa. That has to be spread between Egypt, Morocco, and Tunisia, so you end up with a small exposure in each market.”

Morocco certainly seems to have the track record to warrant increased international investment. Consistently one of the top performing markets in the Mena region, by the end of May it was the only GCC(ex-Saudi Arabia) market showing positive year-to-date growth, according to MSCI Barra.

However, the market still sees relatively small amounts of foreign money, with some claiming that the market is intentionally geared in favour of local investors. “Only about 10% of the free flow in the country is owned by foreign investors,” says Silk Invest’s Maghreb portfolio manager, Youssef Lahlou. “Other than that it’s all Moroccan.”

This could all change if Morocco accepts an official invitation to join the GCC. “That would have a very positive impact on Moroccan funds and the whole Moroccan economy,” says Lahlou. “We would see an important flow of funding from GCC countries and it would help simplify the procedures for those countries that invest here in Morocco."

While it may seem like a good idea in theory, the cultural and geographical distance between Mena’s most Westerly market and the Middle East may make a GCC-facing Morocco difficult to achieve. “I don’t know if it is going to happen,” says Azzi. “There are a lot of differences in the markets. It just won’t work unless Morocco implements changes internally or they have to accept Morocco the way it is.”

GCC inclusion would necessitate a change in domestic investment practices. Current limitations on overseas investment has led to local investors such as pension funds and insurance companies channelling their liquidity into the market. “Due to this continuous flow of liquidity, valuations in Morocco, funds have always been at a premium relative to other markets,” says Sidani. “That’s one reason why foreign investors will not think that the market is appealing enough. This is unique to Morocco.”


In the absence of a competitive fund sector in Morocco, Tunisia emerges as a strong alternative contender. Prior to January’s revolution, the domestic fund industry was attracting interest, winning allocations from Advance Emerging Capital, Templeton and Pictet, among others. A unique clause implemented by the Financial Market Council(CMF) offers tax-free returns on capital gains from Tunisian funds: a tempting prospect for retail and institutional investors alike.

Local asset manager Tunisie Valeurs recently took advantage of this tax break, launching a new fund at a time when many would still consider Tunisia to be in the interim stages of development, politically and economically. However, the fund’s manager Hatem Saighi, told Mena FM that the company now plans to launch one new fund each year, adding: “Over the next two years we think that Tunisia will be a good environment for investment. I am optimistic on the region’s prospects.”

Despite this, at present, market capitalisation in Tunisia is a relatively small $11bn, while it represents only a 1-2% weighting on the MSCI frontier index.

In the short term, political uncertainty and investor caution seem likely to take their toll. Axis Capital’s investor relationship manager Mourad Baly says that the domestic financial sector has already suffered. “Like everywhere, the first sector to take a hit in this environment is banking,” he says.

Rumours of corruption have done little to reassure potential investors. Baly estimates that the formerly powerful Ben Ali family’s exposure to Tunisia’s banks was about $2bn, but denies that fears of corruption and frozen assets have affected the financial industry’s performance. “Initially people were scared that money disappeared but it’s not the case,” he says.

Tunisia’s fresh start, post-Ben Ali, may well lead to a boom period for the country, particularly if the new government can convince foreign investors of market stability and liquidity.

“Before the crisis, Tunisia had a very active IPO market so a lot of companies were coming to the market offering depth and diversification,” says Sidani. “However, recent political developments have slowed down this activity and market conditions will not be favourable again for some time.”

Off-index bets

While the outlook may be hopeful for Morocco and Tunisia, it is a different story elsewhere in the Maghreb. It doesn’t help that Algeria, Mauritania and Libya are not included on any global index. “Algeria’s market is not even on our indices,” says Azzi. “Neither is Libya or Mauritania. In fact, Mauritania is not even on our radar, it’s less than frontier.”

Earlier this year, S&P Indices announced plans to include Libya on its new Union Arab Stock Exchange (UASE) index, but Azzi confirms that these plans have now been shelved. “We did start looking at Libya for inclusion but we’re putting that on hold now,” he says. “We’re going ahead with the index but can’t include Libya for the simple reason that we’re not able to source pricings.”

Libya’s nascent stock exchange was actually developed by Muammar Gaddafi’s government last year, in an effort to kick-start a privatisation programme which never came to fruition. Supported by sovereign wealth and a robust oil industry, it was initially seen to have huge potential. Indeed, Invest AD valued the bourse at more than $2.2bn when it launched its dedicated Libya Fund in January. The fund was wound down the following month when civil war hit the country, and the Libya bourse has been closed since 24 January.

“Setting up stock exchanges would be a nice start in places like Libya and Algeria,” says Sidani. “This is a very important step not only for investors but for the governments, because for a lot of businesses the best way to begin a successful privatisation programme is by setting capital markets and switching ownership of the businesses owned by the public sector so they become held by the private sector and eventually by foreign investors.

“This is a model we have seen in most emerging markets and it has proven to be very successful. The capital market is the best place to start this privatisation programme.”

A strong Libyan economy would have a knock-on effect on its neighbours. Baly says that Libya currently accounts for 1-2% points of Tunisia’s GDP. “They buy everything from us,” he says. “We’re just hoping that Gaddafi won’t stay in power for much longer. Libya could be our biggest client.”

Algeria, on the other hand, seems destined to remain a closed market with under developed capital markets. “Even from a direct investment point of view, the country has been quite closed and some of the big regional companies that had made investments in Algeria are now struggling with the government to protect their rights,” says Sidani.

The Maghreb’s smallest market, Mauritania, is best known for its problems with terrorist organisations and the emerging oil industry. With no independent fund market and an economy bolstered by IMF donations, it seems unlikely to be competing on a regional scale for quite some time.

Reeling from conflict

At the time of writing, Gaddafi’s troops were still locked in conflict with rebel forces, and Libya’s civil war showed no signs of abating. While things seem to have calmed down elsewhere in the Maghreb, one institutional investor recently described Algeria as a “ticking time bomb”, telling Mena FM about fears of a new uprising in North Africa’s last autocracy.

Azzi predicts that due to the recent conflict, new product offerings won’t be rolled out in the Maghreb until Q3 or Q4 of this year. Meanwhile, Sidani admits that Schroders, once bullish on North Africa’s frontier potential, is not currently investing in any of its markets due to lack of visibility on the political scene.

However, all is not lost, and there is every chance that the region could yet represent one of Mena’s most exciting investment stories. “I think the developments that took place across Mena will prove to be very positive for the Maghreb region because governments will feel the heat to push forward with their reforms and privatisation programmes,” says Sidani. “Clearly the transition will be painful in some places like Libya, but opening up these markets is extremely important. Regional companies will be the first beneficiaries as they will be the first movers into these virgin markets, which offer great potential growth opportunities.”

Only time will tell whether or not the Maghreb markets can bounce back from crises and revive the regional fund industry. While recent events have proven that anything can happen when you least expect it, there is every reason to be optimistic. “New markets like Tunisia and Morocco will have great potential for investment,” says Sidani. “These are the next growth stories in the region, but unfortunately not yet.”